SBS

Business Context and Reporting Period

Company: Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE: SBS; BM&FBovespa: SBSP3)

Reporting Period: Second Quarter 2015 (ended June 30, 2015) and First Half 2015.

Business Overview: SABESP is one of the world's largest water and sewage service providers. The reporting period was significantly impacted by a severe water crisis in São Paulo, leading to reduced production volumes and demand management measures.

Key Financial Metrics

Note: All figures are in Brazilian Reais (R$) unless otherwise noted. Total debt figure represents the sum of local and international market obligations as of June 30, 2015.

Material Changes vs. Prior Period

• Revenue Mix: Gross operating revenue from water and sewage services declined 7.9% in 2Q15 due to a 7.5% drop in billed volumes and a 6.4% revenue reduction from the Water Consumption Reduction Incentive Program. Conversely, construction revenue surged 33.3% to R$ 904.8 million, driven by higher investments.
• Profitability: Net income increased 11.5% to R$ 337.3 million. Adjusted EBITDA grew 14.3% to R$ 756.6 million. This growth was largely supported by a significant financial result of R$ 155.4 million (compared to a loss of R$ 21.6 million in 2Q14), primarily due to exchange rate gains on foreign currency liabilities.
• Cost Structure: Total costs and expenses (including construction) rose 1.5%. Excluding construction, operating costs fell 11.2%. Notable cost increases included electric power expenses (+44.2%) due to tariff hikes, while services expenses dropped 23.2% due to reduced advertising campaigns.
• Operating Volumes: Water production volume decreased 14.6% in the quarter and 18.1% in the first half due to the water crisis. Water losses per connection (IPDt) dropped significantly to 272 liters/connection/day from 356 liters/connection/day.

Guidance, Outlook, and Risks

• Water Crisis Impact: Management highlighted the substantial reduction in water production and the necessity of reducing network pressure as a demand management mechanism. This continues to be a primary operational risk.
• Tariff Adjustments: Revenue was partially mitigated by a 15.2% tariff increase effective June 2015 (comprising ordinary and extraordinary revisions) and a 6.5% repositioning index applied since December 2014.
• Debt Management: The company fully redeemed its 16th debenture issue (R$ 500 million) on June 24, 2015, without paying a premium. Total outstanding debt obligations are approximately R$ 11.1 billion.
• Liquidity: Cash and cash equivalents decreased by R$ 920 million in the first half of 2015, ending at R$ 803 million. Net cash used in investing activities was R$ 1.2 billion, primarily for capital expenditures.
• Forward-Looking Statements: The filing contains standard disclaimers regarding uncertainties in economic conditions, industry trends, and the implementation of capital expenditure plans.

Investor Verification Checklist

• Water Crisis Duration: Verify the projected timeline for the resolution of the water crisis and its potential long-term impact on billed volumes and revenue.
• Exchange Rate Sensitivity: Assess the sustainability of the financial result, which was heavily influenced by favorable exchange rate variations on foreign debt (USD and JPY depreciation vs. BRL).
• Capital Expenditure (Capex): Confirm the execution of the R$ 1.5 billion Capex plan for the first half of 2015 and its alignment with infrastructure needs.
• Debt Maturity Profile: Review the detailed debt schedule, noting significant maturities in 2016 (R$ 1.2 billion) and 2017 (R$ 1.4 billion).
• Regulatory Tariff Environment: Monitor the implementation and effectiveness of the June 2015 tariff increases in offsetting volume declines.